I. Management’s Discussion and Analysis

Supervision and Consumer Protection

Supervision and consumer protection are
cornerstones of the FDIC’s efforts to ensure the
stability of and public confidence in the nation’s
financial system. The FDIC’s supervision program
promotes the safety and soundness of FDIC-supervised
IDIs, protects consumers’ rights, and
promotes community investment initiatives.

Examination Program

The FDIC’s strong bank examination program
is the core of its supervisory program. As of
December 31, 2010, the Corporation was the
primary federal regulator for 4,386 FDIC-insured,
state-chartered institutions that were not
members of the Federal Reserve System (generally
referred to as “state non-member” institutions).
Through risk management (safety and soundness),
consumer compliance and Community
Reinvestment Act (CRA), and other specialty
examinations, the FDIC assesses an institution’s
operating condition, management practices and
policies, and compliance with applicable laws and
regulations. The FDIC also educates bankers and
consumers on matters of interest and addresses
consumer questions and concerns.

As of December 31, 2010, the Corporation
conducted 2,720 statutorily required
risk management (safety and soundness)
examinations, including a review of Bank
Secrecy Act compliance, and all required
follow-up examinations for FDIC-supervised
problem institutions within prescribed time
frames. The FDIC also conducted 1,780 CRA/
compliance examinations (914 joint CRA/
compliance examinations, 854 compliance-only
examinations,³ and 12 CRA-only examinations)
and 3,276 specialty examinations. All CRA/
compliance examinations were also conducted
within the time frames established by FDIC
policy, including required follow-up examinations
of problem institutions. The following table
compares the number of examinations, by type,
conducted from 2008 through 2010.

³ Compliance-only examinations are conducted for most institutions at or near the mid-point between joint compliance/
CRA examinations under the Community Reinvestment Act of 1977, as amended by the Gramm-Leach-Bliley Act
of 1999. CRA examinations of financial institutions with aggregate assets of $250 million or less are subject to a CRA
examination no more than once every five years if they receive a CRA rating of “Outstanding” and no more than once
every four years if they receive a CRA rating of “Satisfactory” on their most recent examination.

FDIC Examinations 2008 – 2010

2010

2009

2008

Risk Management (Safety and Soundness):

State Non-member Banks

2,488

2,398

2,225

Savings Banks

225

203

186

Savings Associations

0

1

1

National Banks

3

0

2

State Member Banks

4

2

2

Subtotal – Risk Management Examinations

2,720

2,604

2,416

CRA/Compliance Examinations:

Compliance/Community Reinvestment Act

914

1,435

1,509

Compliance-only

854

539

313

CRA-only

12

7

4

Subtotal – CRA/Compliance Examinations

1,780

1,981

1,826

Specialty Examinations:

Trust Departments

465

493

451

Data Processing Facilities

2,811

2,780

2,577

Subtotal – Specialty Examinations

3,276

3,273

3,028

Total

7,776

7,858

7,270

Risk Management

As of December 31, 2010, there were 884 insured
institutions with total assets of $390.0 billion
designated as problem institutions for safety and
soundness purposes (defined as those institutions
having a composite CAMELS4 rating of “4” or
“5”), compared to the 702 problem institutions
with total assets of $402.8 billion on December
31, 2009. This constituted a 26 percent increase
in the number of problem institutions and a 3
percent decrease in problem institution assets.
In 2010, 267 institutions with aggregate assets
of $157 billion were removed from the list
of problem financial institutions, while 449
institutions with aggregate assets of $198 billion
were added to the list. Westernbank Puerto Rico,
Mayaguez, Puerto Rico, which was the largest
failure in 2010, with $11.9 billion in assets, was
added to the problem institution list in 2008 and
resolved in 2010. The FDIC is the primary federal
regulator for 583 of the 884 problem institutions,
with total assets of $202.5 billion and $390.0
billion, respectively.

During 2010, the Corporation issued the
following formal and informal corrective actions
to address safety and soundness concerns:
300 Consent Orders and 424 Memoranda of
Understanding. Of these actions, 9 Consent Orders and 16 Memoranda of
Understanding
were issued based, in part, on apparent violations
of the Bank Secrecy Act.

The FDIC is required to conduct follow-up
examinations of all state non-member institutions
designated as problem institutions within 12
months of the last examination. As of December
31, 2010, all follow-up examinations for problem
institutions were performed on schedule.

³ The CAMELS composite rating represents the adequacy of Capital, the quality of Assets, the capability of Management, the quality and level of Earnings, the adequacy of Liquidity, and the Sensitivity to market risk, and ranges from “1” (strongest) to “5” (weakest). ² This figure reflects fees assessed through September 30, 2010, and collected as of December 30, 2010.

Compliance

As of December 31, 2010, there were 54 insured
state non-member institutions with total assets
of $36.4 billion, rated “4” or “5” for consumer
compliance purposes. All follow-up examinations
for these institutions were performed on schedule.

During 2010, the Corporation issued the
following formal and informal corrective actions
to address compliance concerns: 23 Consent
Orders and 122 Memoranda of Understanding.

Bank Secrecy Act/Anti-Money Laundering

The FDIC pursued a number of Bank Secrecy Act
(BSA), Counter-Financing of Terrorism (CFT),
and Anti-Money Laundering (AML) initiatives
in 2010.

The FDIC conducted three training sessions in
2010 for 65 central bank representatives from
Afghanistan, Argentina, Ghana, Iraq, Jordan,
Kuwait, Mali, Mauritania, Morocco, Nigeria,
Pakistan, Paraguay, Qatar, Senegal, and Turkey.
The training focused on AML/CFT controls,
the AML examination process, customer due
diligence, suspicious activity monitoring, and
foreign correspondent banking. The sessions also
included presentations from the Federal Bureau
of Investigation (FBI) on combating terrorist
financing, and the Financial Crimes Enforcement
Network (FinCEN) on the role of financial
intelligence units in detecting and investigating
illegal activities.

This year, the inaugural Advanced International
AML/CFT School was offered. The goal of this
course is to provide seasoned government staff
with an appropriate understanding of high-risk
areas and transactions, their potential effect on a
financial institution, and how to identify potential
red flags. Expert instructors were provided by
the United States Attorney’s Office, the Drug
Enforcement Administration, U.S. Immigration
and Customs Enforcement, the FBI, FinCEN,
and the FDIC’s Legal Division.

Additionally, the FDIC met with eight Namibian
and Zambian foreign officials and 14 European
representatives as a part of the U.S. Department of
State’s International Visitor Leadership Program to
discuss the FDIC’s AML Supervisory Program.

FFIEC BSA/AML Examination Manual

The FDIC participated in the revision and
issuance of the 2010 FFIEC BSA/AMLExamination Manual. The manual was released
by the Federal Financial Institutions Examination
Council (FFIEC) for publication and distribution
on April 29, 2010. It reflects the ongoing
commitment of the federal banking agencies
to provide current and consistent guidance on
risk-based policies, procedures, and processes
for banking organizations to comply with the
BSA and to safeguard operations from money
laundering and terrorist financing. The manual
was updated to further clarify supervisory
expectations and to incorporate regulatory
changes since the 2007 release. The revisions also
reflect feedback from the banking industry and
examination staff. The FDIC has also translated
the manual into Spanish.

Minority Depository Institution Activities

The preservation of Minority Depository
Institutions (MDIs) remains a high priority for the
FDIC. In 2010, the FDIC continued to seek ways
to improve communication and interaction with
MDIs and to respond to the concerns of minority
bankers. Many of the MDIs took advantage of
the technical assistance offered by the FDIC,
requesting technical assistance on a number of
bank supervision issues, including but not limited
to, the following:

Troubled Asset Relief Program (TARP)

Deposit insurance assessments

Proper use of interest reserves

Filing branch and merger applications

Complying with Part 365 – Real Estate
Lending Standards

Preparing Call Reports

Performing due diligence for loan
participations

Monitoring CRE concentrations

Reducing adversely classified assets

Identifying and monitoring reputation risk

Maintaining adequate liquidity

Compliance issues

Community Reinvestment Act (CRA)

Procedures for filing regulatory appeals

Criteria for assigning CAMELS ratings

The FDIC continued to offer the benefit of
having an examiner or a member of regional office
management return to FDIC-supervised MDIs
from 90 to 120 days after examinations to assist
management in understanding and implementing
examination recommendations or to discuss other
issues of interest. Ten MDIs took advantage of this
initiative in 2010. Also, the FDIC regional offices
held outreach training efforts and educational
programs for MDIs.

The FDIC hosted a series of Asset Purchaser,
Investor, and Minority Depository Institutions
Outreach seminars throughout the country, where
investors, and minority- and women-owned
firms received information on purchasing assets from the FDIC and
opportunities for investors
to invest in or establish an MDI. Seminars were
held in Atlanta, GA; New York, NY; Houston,
TX; Miami, FL; Los Angeles, CA; San Francisco,
CA; and Washington, DC. The seminars were well
received, with over 650 participants in attendance.

The FDIC held quarterly conference calls and
banker roundtables with MDIs in the geographic
regions. Topics of discussion for the quarterly calls
included both compliance and risk management
topics, and topics at the roundtables included
the economy, overall banking conditions, deposit
insurance assessments, accounting, and other bank
examination issues.

The FDIC partnered with the Federal Reserve’s
Partnership for Progress to provide technical
assistance and training to MDIs interested
in applying for the New Markets Tax Credit
(NMTC). The training consisted of a series
of webinars to educate MDIs about becoming
Community Development Entities, completing
NMTC applications, and best practices on
NMTC projects.

Capital and Liquidity Rulemaking and Guidance

Credit Ratings ANPR

In August 2010, the FDIC, along with the
other federal banking agencies, published
an Advance Notice of Proposed Rulemaking
(ANPR) regarding alternatives to the use of credit
ratings in the risk-based capital rules for banking
organizations. The ANPR was issued in response
to section 939(A) of the Dodd-Frank Act, which
requires the agencies to review regulations that
(1) require an assessment of the creditworthiness
of a security or money market instrument,
and (2) contain references to or requirements
regarding credit ratings. In addition, the agencies
are required to remove such references and
requirements and substitute in their place uniform
standards of creditworthiness, where feasible.

Market Risk NPR

In December 2010, the FDIC Board of Directors
approved the publication of a joint Notice
of Proposed Rulemaking (NPR) designed to
enhance the market risk capital framework by
addressing default and credit risk migration,
innovations in trading book exposures, and other
deficiencies revealed during the recent financial
crisis. Enhancements to the framework include
requirements to compute capital for stressed value-at-risk, and incremental default risk, standardized
capital requirements for certain securitization
positions, a capital floor for correlation trading
exposures, and increased transparency through
enhanced disclosures.

Advanced Approaches Floor NPR

In December 2010, the FDIC Board of Directors
approved a joint NPR to implement certain
requirements of Section 171 of the Dodd-
Frank Act. Section 171 requires, among other
things, that the agencies’ generally applicable
capital requirements serve as a floor for other
capital requirements the agencies may establish
and, specifically, as a permanent floor for the
advanced approaches risk-based capital rule. Final
rulemaking will be completed in 2011.

FAS 166 and 167 Final Rule

In January 2010, the agencies finalized the
amendment to the risk-based capital rules to
reflect the issuance of FAS 166 and 167, which
required certain off-balance-sheet assets to be
moved back onto a bank’s balance sheet. The
final rule provided an optional transition period
that allowed a bank to phase in over one year
the impact on risk-weighted assets of the change
in the U.S. generally accepted accounting rules.
The rule also eliminated the exclusion of certain
consolidated asset-backed commercial paper
programs from risk-weighted assets.

Interest Rate Risk

Economic conditions in 2010 presented
significant risk management challenges to
depository institutions. For a number of
institutions, increased loan losses and sharp
declines in the value of certain securities portfolios
placed downward pressure on capital and earnings.
In the prevailing interest rate environment, taking
advantage of a steeply upward sloping yield curve
by funding longer-term assets with shorter-term liabilities may have
provided short-term gains
to earnings helping offset losses, but could pose
risks to an institution’s capital and future earnings
should short-term interest rates rise. To reinforce
the federal banking agencies’ existing guidance—The Joint Agency Policy Statement on Interest
Rate Risk—and to remind institutions to not lose
focus on their management of interest rate risk,
the agencies issued new guidance on January 6,
2010—Advisory on Interest Rate Risk Management.
The guidance updated and clarified existing
supervisory guidance on the sound practices
for managing interest rate risk, noting that
institutions should assess the likely effects
of meaningful stress scenarios, including interest
rate shocks of at least 300 to 400 basis points
and that institutions are expected to conduct
independent reviews of their interest rate risk
models and management processes.

Liquidity Guidance

Recent turmoil in the financial markets
emphasized the importance of effective liquidity
risk management for the safety and soundness
of financial institutions. To emphasize the
importance of cash flow projections, diversified
funding sources, stress testing, a cushion of
liquid assets, and a formal, well-developed
contingency funding plan as primary tools for
measuring and managing liquidity risk, the
federal banking agencies issued new guidance on
March 22, 2010—Funding and Liquidity Risk
Management. This policy statement summarizes
the principles of sound liquidity risk management
issued in the past and, when appropriate,
supplements them with the ‘‘Principles for Sound
Liquidity Risk Management and Supervision’’
issued by the BCBS in September 2008.

Other Guidance Issued

During 2010, the FDIC issued and participated
in the issuance of other guidance in several areas as
described below.

Bargain Purchases and Assisted Acquisitions

Market conditions in the banking industry,
including the significant number of FDIC-assisted
acquisitions of failed depository institutions, have
contributed to an increase in bargain purchase
transactions. A bargain purchase occurs when
the fair value of the net assets acquired in a
business combination exceeds the fair value of
any consideration transferred by the acquiring
institution. Bargain purchase gains are reported
in earnings and included in the computation
of regulatory capital under the agencies’ capital
standards. To address the supervisory issues arising
from business combinations that result in bargain
purchase gains, the FDIC, along with the other
financial regulators, issued Interagency Supervisory
Guidance on Bargain Purchases and FDIC- and
NCUA-Assisted Acquisitions on June 7, 2010. The
guidance addresses the agencies’ concerns about
the quality and composition of capital when a
bargain purchase gain is expected to result from
a business combination and describes the capital
preservation and other conditions the agencies
may impose in their approval of acquisitions. The
guidance also discusses the agencies’ expectations
with respect to the appropriate application of
accounting standards to business combinations.

Examinations of Institutions with FDIC
Loss-Share Agreements

Beginning in 2009, the FDIC increasingly entered
into loss-share agreements with institutions
acquiring failed IDIs. Under such an agreement,
the FDIC and an acquiring institution share in the
losses on a specified pool of a failed institution’s
assets, which maximizes asset recoveries and
minimizes losses to the DIF. In May 2010, the
FDIC issued guidance to its examination staff
on how examiners should take into account
the implications and benefits of loss-share in
their supervision of banks that have acquired
assets of failed institutions covered by loss-share
agreements. Examiners are expected to consider
the impact of these agreements when performing
asset reviews, assessing accounting entries,
assigning adverse classifications, and determining
CAMELS ratings and examination conclusions.
The FDIC has made this examination guidance
available to bankers, the other banking agencies,
and other parties to promote their understanding
of the FDIC’s approach to the examination of
banks with loss-share agreements. To provide greater visibility to the
effect of loss-share
agreements on the examination process, the
Summer 2010 issue of the FDIC’s Supervisory
Insights, published in June, included “FDIC
Loss-Sharing Agreements: A Primer”. This article
provides an overview of the loss-share process,
addresses the regulatory treatment of assets subject
to these agreements, and discusses the accounting
rules and capital implications for the acquisition
of failed bank assets.

In 2010, the FDIC actively engaged with the
U.S. Department of the Treasury (Treasury) and
the other federal bank regulatory agencies in
considering applications to the Troubled Asset
Relief Program’s (TARP) Community Development
Capital Initiative (CDCI). The TARP CDCI
invested lower-cost capital in Community
Development Financial Institutions (CDFIs),
which are financial institutions that target at least
60 percent of their lending and other economic
development activities in areas underserved by
traditional financial services providers. In its
role as primary federal supervisor for state nonmember
institutions, the FDIC reviewed 64
TARP CDCI applications and forwarded approval
recommendations to Treasury for 12 institutions
that met Treasury’s Program standards. Treasury
approved ten institutions for participation in
the Program.

The FDIC desired to reach a favorable
recommendation for all TARP CDCI applications
and worked closely with bank managements that
were striving to achieve Treasury’s standards for
approval. CDFIs can provide critically needed
loan and depository services to underserved
communities.

Meeting the Credit Needs of Creditworthy
Small Business Borrowers

In response to difficulties some small business
owners are experiencing in obtaining or renewing
credit to support their operations, the FDIC,
along with other financial regulators, issued
Interagency Statement on Meeting the Credit
Needs of Creditworthy Small Business Borrowers
on February 12, 2010. The statement builds
on principles of existing guidance and strives
to ensure that supervisory policies do not
inadvertently curtail the availability of credit to
sound small business borrowers. The statement
reiterates regulatory expectations for institutions
to effectively monitor and manage credit
concentrations but notes that institutions should
not automatically refuse credit to sound borrowers
because of their particular industry or
geographic location.

The statement also explains that examiners will
not criticize prudent underwriting practices, that
examiners will take a balanced approach when
assessing small business lending activities, and that
examiners will not adversely classify loans solely
due to declining collateral values, provided that a
borrower has the willingness and ability to repay
loans according to reasonable terms.

Correspondent Concentration Risks

On April 30, 2010, the FDIC, along with the
other financial regulators, issued guidance on
Correspondent Concentration Risks to outline the
agencies’ expectations for identifying, monitoring,
and managing correspondent concentration risks.
The guidance addresses the agencies’ expectations
relative to performing due diligence on credit
exposures to, and funding transactions with,
other financial institutions. The guidance notes
that a financial institution’s relationship with a
correspondent may result in credit and funding
concentrations and acknowledges that, while some
correspondent concentrations meet legitimate
business needs, the concentrations represent
a lack of diversification management should
address when formulating strategic plans and risk
management policies and procedures.

Appraisal and Evaluation Guidelines

On December 2, 2010, the FDIC, along with
the other federal banking agencies, issued final
Interagency Appraisal and Evaluation Guidelines
to provide further clarification of the agencies’
appraisal regulations and supervisory guidance
to institutions and examiners about prudent
appraisal and evaluation programs. The guidelines
reflect changes in appraisal standards and advancements in regulated
institutions’ collateral
valuation methods and clarify longstanding
supervisory expectations for an institution’s
appraisal and evaluation program to conduct
real estate lending in a safe and sound manner.
Further, the guidelines promote consistency in
the application and enforcement of the agencies’
appraisal regulations and safe and sound
banking practices.

Incentive Compensation

On June 21, 2010, the FDIC joined the other
federal banking agencies in issuing interagency
Guidance on Sound Incentive Compensation Policies.
This guidance was issued to address incentive
compensation practices in the financial services
industry that contributed to the recent financial
crisis. The guidance uses a “principles-based”
approach and describes the agencies’ expectations
for banking organizations to maintain incentive
compensation practices consistent with safety-and-soundness standards. One main goal of
the guidance is to align employee rewards with
longer-term organizational objectives, including
consideration of potential risks and risk outcomes.

Golden Parachute

As part of supervisory efforts to address executive
compensation in the financial services industry,
the FDIC issued Guidance on Golden Parachute
Applications on October 14, 2010, to clarify
the golden parachute application process
for troubled institutions, specify the type of
information necessary to satisfy the certification
requirements, and highlight factors considered by
supervisory staff when determining whether to
approve a golden parachute payment. A golden
parachute payment refers to amounts paid by
troubled entities to an institution-affiliated
party (IAP) that are contingent on the IAP’s
termination. Applications made on behalf of
senior management will be subject to heightened
scrutiny that will include an evaluation of the
individual’s performance and involvement in
corporate initiatives and policymaking. For
lower-level employees, a de minimis golden
parachute payment of up to $5,000 per individual
is permissible without a supervisory application
in most cases. The bank is required to maintain a
record of the individuals receiving the payments,
together with signed and dated certifications of
the amounts received.

Concerns with Energy Lending Programs

The FDIC, along with other financial regulators,
issued an alert on July 6, 2010, notifying financial
institutions about a Federal Housing Finance
Authority (FHFA) Statement Relative to Concerns
with Certain Energy Lending Programs. The
statement relates to FHFA and FDIC concerns
with certain energy retrofit lending programs
and indicates institutions should be aware of
such programs, as deficiencies within the
programs, such as weak underwriting and
consumer-protection standards, could affect an
institution’s residential mortgage lending activities
and its ability to sell loans to Fannie Mae and
Freddie Mac.

Secure and Fair Enforcement for Mortgage
Licensing Act of 2008

On July 28, 2010, the FDIC along with the other
federal banking agencies, published the final rule
implementing the requirements of the Secure
and Fair Enforcement for Mortgage Licensing
Act of 2008 (SAFE Act). The SAFE Act requires
residential mortgage loan originators who are
employees of national and state banks, savings
associations, Farm Credit System institutions,
credit unions, and certain of their subsidiaries
(agency-regulated institutions) to be registered
in the Nationwide Mortgage Licensing System
and Registry, an online database. The FIL
highlights the rule’s requirements for appropriate
policies, procedures, and management systems
to ensure compliance with the SAFE Act.
The SAFE Act is intended to improve the
accountability and tracking of residential mortgage
loan originators (MLOs), enhance consumer
protection, reduce fraud, and provide consumers
with easily accessible information regarding an
MLO’s professional background.

Municipal Advisor Rule

On October 1, 2010, the FDIC issued a FIL
announcing the Securities and Exchange
Commission’s (SEC) issuance of an interim final
temporary rule requiring all municipal advisors to
register with the SEC by October 1, 2010. The
FIL highlights definitions of municipal advisors
and municipal financial products, and notified
financial institutions that they should review their
dealings with municipal entities to determine
if such dealings will require registration as a
municipal advisor.

Regulatory Relief

During 2010, the FDIC issued 23 Financial
Institution Letters (FILs) that provided guidance
to help financial institutions and facilitate recovery
in areas damaged by severe storms, tornadoes,
flooding, and other natural disasters.

Consumer Protection and Compliance Rules
and Guidance

In March 2010, the FDIC approved and issued,
along with the other federal bank regulators,
updated Interagency Questions and Answers
Regarding Community Reinvestment. These Q&As
consolidate and supersede all previously published
versions of this guidance. A new Q&A provides
examples of how to demonstrate that community
development services meet the criteria of serving
low- and moderate-income areas and people. The
revised Q&As enable consideration of a pro rata
share of mixed income affordable housing projects
as community development projects.

In September 2010, the FDIC, along with the
other federal bank regulators, issued a final CRA
rule to implement a provision of the Higher
Education Opportunity Act. The rule provides for
consideration of low-cost higher education loans
to low-income borrowers as a positive factor when
assessing a financial institution’s record of meeting
community credit needs under the CRA. The
rule also incorporates a CRA statutory provision
that allows the agencies to consider a financial
institution’s capital investment, loan participation,
and other ventures with minority-owned financial
institutions, women-owned institutions, and low-income
credit unions as factors in assessing the
institution’s CRA record.

In December 2010, the agencies published
a final CRA rule that revises the definition
of “community development” in the CRA
regulations to provide favorable CRA
consideration for loans, investments, and
services by financial institutions that directly
support, enable or facilitate eligible projects
and activities in designated target areas of the
Neighborhood Stabilization Program (NSP)
approved by the Department of Housing and
Urban Development. The expanded definition
of “community development” in the CRA
regulations will help leverage NSP funds in areas
experiencing high foreclosure and vacancy rates
and neighborhood blight.

In May 2010, the FDIC issued guidance to assist
lenders in meeting their compliance obligations
under the National Flood Insurance Program
(NFIP) during periods when the statutory
authority of the Federal Emergency Management
Agency (FEMA) to issue flood insurance contracts
under the NFIP lapses. In December 2010, the
FDIC issued a notice to its supervised financial
institutions that FEMA announced that Preferred
Risk Policy eligibility will be extended two years
beginning January 1, 2011.

In August 2010, the FDIC, in cooperation
with the other FFIEC member agencies, issued
supervisory guidance on reverse mortgage
products. The guidance emphasizes the consumer
protection concerns raised by reverse mortgages
and the importance of financial institutions
mitigating the compliance and reputation risks
associated with these products.

In September 2010, the FDIC issued a
compliance guide for state non-member banks
wishing to use the model privacy form to comply
with disclosure requirements under the Gramm-
Leach-Bliley Act.

In November 2010, the FDIC issued final
supervisory guidance on overdraft payment
programs. The final guidance reaffirms existing supervisory
expectations described in the February
2005 Joint Guidance on Overdraft Protection
Programs, and provides specific guidance with
respect to automated overdraft payment programs.
In particular, the FDIC guidance states that
financial institution management should be
especially vigilant with respect to product overuse,
which may harm consumers.

Monitoring Emerging Risks

The FDIC relies heavily on on-site supervisory
activities to identify existing and emerging risks.
In addition to on-site supervisory activities,
the FDIC uses several established off-site
processes, including the Statistical CAMELS
Off-site Rating (SCOR) system and the Growth
Monitoring System (GMS), as well as more recent
comprehensive reviews (such as the Quarterly
Supervisory Risk Profile), to assess how identified
risks are likely to affect insured institutions’ risk
profiles and ratings. These ongoing analyses have
been augmented with numerous ad hoc reviews,
such as reviews of commercial real estate lending
trends, interest rate risk exposure, allowance
for loan and lease loss trends, and dividend
payments. Furthermore, the FDIC replaced its
former Underwriting Survey with a Credit and
Consumer Products/Services Survey. The new
survey extends beyond underwriting practices and
addresses new or evolving products, strategies,
and consumer compliance issues and is now
completed by examiners at the conclusion of
each risk management and consumer compliance
examination. Supervisory staff monitors and
analyzes this real-time examiner input and uses
the information to help determine the need
for changes in policy guidance or supervisory
strategies as appropriate.

Regulatory Reporting Revisions

The FDIC, jointly with the Office of the
Comptroller of the Currency and the Federal
Reserve Board, implemented revisions to the
Consolidated Reports of Condition and Income
(Call Reports) that took effect in March and
December 2010. The revisions responded to such
developments as the temporary increase in the
deposit insurance limit, changes in accounting
standards, and credit availability concerns. The
reporting changes that took effect on March
31, 2010, included new data on other than
temporary impairments of debt securities, loans
to non-depository financial institutions, and assets
acquired from failed institutions covered by FDIC
loss-share agreements; additional data on certain
time deposits and unused commitments; and a
change from annual to quarterly reporting for
small-business and small-farm lending data.
The agencies began to collect new data
pertaining to reverse mortgages annually
effective December 31, 2010.

As a result of a change in the basis for calculating
assessments for banks participating in the FDIC’s
TAGP in the third quarter of 2010, the agencies
revised the Call Report items used to collect
data on TAGP-eligible accounts in September
2010. For the final two quarters of the TAGP,
participating banks were required to report the
total dollar amount and number of TAGP-eligible
accounts as average daily balances rather than
quarter-end balances.

With the enactment of temporary unlimited
insurance coverage for noninterest-bearing
transaction accounts by the Dodd-Frank Act
effective December 31, 2010, the agencies added
two new items to the Call Report as of that date
for the reporting of the quarter-end dollar amount
and number of noninterest-bearing transaction
accounts as defined in the Act. These new items
must be completed by all banks, not only those
that participated in the TAGP.

In September 2010, the agencies proposed several
revisions to the Call Report, primarily to assist
the agencies in gaining a better understanding
of banks’ credit and liquidity risk exposures. The
proposed revisions, which took effect on March
31, 2011, include additional data on troubled
debt restructurings, commercial mortgage-backed
securities, private sector deposits, loans and other
real estate covered by FDIC loss-share agreements,
bank-owned life insurance, and trust department
collective investment funds; new data on auto
loans, deposits obtained through deposit listing
services, and assets and liabilities of consolidated variable interest
entities and captive insurance
subsidiaries; and instructional revisions relating to
construction loans and repricing data.

Promoting Economic Inclusion

The FDIC undertook a number of initiatives in
2010 to promote financial access to IDIs for low- and
moderate-income communities.

Alliance for Economic Inclusion

The goal of the FDIC’s Alliance for Economic
Inclusion (AEI) initiative is to collaborate with
financial institutions; community organizations;
local, state, and federal agencies; and other
partners in select markets to launch broad-based
coalitions to bring unbanked and underserved
consumers into the financial mainstream.

The FDIC expanded its AEI efforts during 2010
to increase measurable results in the areas of
new bank accounts, small-dollar loan products,
remittance products, and the delivery of financial
education to more underserved consumers.
During 2010, over 152 banks and organizations
joined AEI nationwide, bringing the total number
of AEI members to 1,119. There were 45,776 new
bank accounts opened during 2010, bringing the
total number of bank accounts opened through
the AEI to 208,458. During 2010, approximately
56,556 consumers received financial education
through the AEI, bringing the total number of
consumers educated to 199,392. Also, 48 banks
were in the process of offering or developing
small-dollar loans, 27 banks were offering
remittance products, and 26 banks were providing
innovative savings products through the AEI at
the end of 2010.

During 2010, the FDIC expanded its efforts
to address additional markets with high
concentrations of unbanked and underbanked
households and aligned its targeted efforts with
the results of its 2009 unbanked survey. Presently
in 14 markets, the FDIC began the initial
organization and planning for AEI initiatives in
two additional markets: Milwaukee, WI, and
St. Louis, MO. Additionally, the FDIC worked
closely during 2010 to provide technical assistance
and support to communities in Ohio and
northwestern Indiana interested in forming AEI
coalitions, and provided a loaned executive to lead
the Bank On California campaign.

The FDIC also worked closely during 2010 with
the National League of Cities to provide technical
assistance to facilitate the implementation of Bank
On campaigns in: Seattle, WA; Savannah, GA;
Houston and San Antonio, TX; Indianapolis, IN;
Aurora, IL; Gaithersburg, MD; and Jacksonville,
FL. The FDIC was also invited to serve as a
working committee member and advisor to
facilitate the launch of a Bank On Washington,
DC, campaign launched in April 2010.

Advancing Financial Education

The FDIC’s award-winning Money Smart
curriculum is available in seven languages, large-print
and Braille versions, as computer-based
instruction, and as podcast audio instruction.
Since its inception, over 2.4 million individuals
have participated in Money Smart classes and self-paced
computer-based instruction. Approximately
300,000 of these participants subsequently
established new banking relationships.

The FDIC significantly expanded its financial
education efforts during 2010 through a multi-part
strategy that included making available
timely, high-quality financial education
products, expanding delivery channels, and
sharing best practices.

In 2010, the FDIC released an enhanced version
of its instructor-led Money Smart financial
education curriculum for adults. The enhanced
curriculum incorporates changes in the law and
industry practices that have occurred since Money Smart was
last revised in 2006. For instance, the
curriculum reflects recent amendments to the
rules pertaining to credit cards as well as the new
overdraft opt-in rule. A new module, Financial
Recovery, provides an overview of the steps
consumers can take to rebuild their finances after a
financial setback. Similar enhancements were also
made to Money Smart for Young Adults.

The FDIC also released a Spanish language
version of the Money Smart Podcast Network, a
portable audio version of Money Smart suitable for use with
virtually all MP3 players. Showing
the appeal of a portable audio version, the MP3
English version received more than 522,000 hits
during more than 23,000 individual sessions
(individual visitors) during 2010, and the Spanish
version received nearly 1,000 hits between its
release on October 14, 2010, and year-end.

The FDIC’s delivery channels for financial
education were expanded, in particular, through
a historic partnership agreement signed on
November 15, 2010, with the National Credit
Union Administration and the U.S. Department
of Education, to promote financial education
and access for low- and moderate-income
students. The agreement will promote educators
and IDIs working together to help students
receive financial education and use mainstream
banking products.

Financial education best practices were shared
through four editions of Money Smart News,
which reached over 40,000 subscribers. Success
stories were shared on topics including reaching
households struggling to survive a job loss and
providing financial education to
college students.

As a member of the Financial Literacy and
Education Commission, the FDIC continued
to actively support the Commission’s efforts to
improve financial literacy in America. During
2010, the FDIC was significantly involved in
the work of the National Strategy Working
Group, which was charged with drafting a new
national strategy to promote financial literacy
and education. In addition, the FDIC chairs the
Commission’s Core Competencies Subcommittee,
which worked closely with the Department
of the Treasury and a group of experts in the
financial education field, including researchers
and practitioners, to help draft the various core
principles that individuals should know and the
basic concepts program providers should cover.

The FDIC also took a leadership role among
federal agencies to promote the 2010 America
Saves Week to encourage consumers to establish
a basic savings account or boost existing savings.
Chairman Bair authored the nationally distributed
Your Savings – Good for You, Your Family, and Your
Peace of Mind op-ed. In addition, a video featuring
Chairman Bair encouraging consumers to save
and participate in America Saves Week received
over 6,000 views on YouTube and was featured on
the homepage of America Saves. The FDIC also
provided technical assistance or other involvement
to at least 15 America Saves coalitions.

Leading Community Development

FDIC community affairs staff are located in
each of the FDIC’s regions and lead a range of
community development activities. In 2010,
the FDIC undertook over 200 community
development, technical assistance, financial
education, and outreach activities and events.
These activities were designed to promote
awareness of investment opportunities to financial
institutions, access to capital within communities,
knowledge-sharing among the public and private
sector, and wealth-building opportunities for
families. Staff also provided technical assistance
and training to financial institutions on
community development and other CRA-related
topics. Representatives throughout the financial
industry and their stakeholders collaborated
with the FDIC on a broad range of initiatives
structured to meet local and regional needs for
financial products and services, credit, asset-building,
affordable housing, small business and
micro-enterprise development, and financial
education.

During 2010, the FDIC launched a pilot initiative
to build awareness of the FDIC’s asset purchase
opportunities among nonprofit affordable
housing developers, NSP grantees, and local
municipalities. The pilot was designed to increase
their access and ability to successfully bid on
and acquire FDIC-owned real estate from failed
banks for redevelopment for affordable housing
and other community development purposes.
As a result, 30 properties were purchased from
the FDIC by NSP grantees and redeployed as
affordable housing in the southeast region.

Recognizing the importance of small business
growth and job creation as an essential
component in America’s economic recovery, the
FDIC continued its emphasis on facilitating
small-business development, expansion, and
recovery during 2010. The FDIC entered into
a strategic alliance with the U.S. Small Business
Administration (SBA) on September 8, 2010,
to facilitate the development and expansion, of
small businesses. As part of the agreement, the
FDIC and the SBA collaborated in co-sponsoring
small-business information, resource, and
capacity-building seminars in New York, NY;
Los Angeles, CA; Memphis, TN; Greensboro,
AL; Jackson, MS; New Orleans, LA; Tampa, FL;
Richmond, VA; and Raleigh, NC. The events
provided information and resources to over 1,500
small business owners, entrepreneurs, banking
professionals and others.

The FDIC continued its initiative to help
consumers and the banking industry avoid
unnecessary foreclosures and stop foreclosure
“rescue” scams that promise false hope to
consumers at risk of losing their homes.

The FDIC focused its foreclosure mitigation
efforts in three areas during 2010:

Direct outreach to consumers with
information, education, counseling, and
referrals. During 2010, in collaboration
with NeighborWorks® America, the FDIC
sponsored four counselor-driven homeowner
outreach events in high-need markets to
provide face-to-face assistance for borrowers
at risk of foreclosure. More than 4,000
homeowners attended these events.

Industry outreach and education
targeted to lenders, loan servicers, local
governmental agencies, housing counselors,
and first responders (faith-based
organizations, advocacy organizations,
social service organizations, etc.). During
2010, the FDIC hosted or co-hosted five
major loan modification scam outreach
events in collaboration with NeighborWorks®
America. These events were targeted to local
agencies and nonprofits that have the capacity
to educate stakeholders. These events resulted
in more than 40,000 pieces of FDIC-branded
outreach materials provided to partners for
distribution, and led to more than 200 scams
being reported to authorities.

Support for capacity-building initiatives
to help expand the quantity and quality
of foreclosure counseling assistance that
is available within the industry. Working
closely with NeighborWorks® America and
other national and local counselors and
intermediaries, the FDIC worked to support
industry efforts to build the capacity of
housing counseling agencies. For example, the
FDIC facilitated two community stabilization
place trainings, which led to more than 69
homeownership professionals being trained
in best practices and strategies to promote
community recovery.

Gulf Coast Oil Spill Response

The FDIC strongly supported efforts to expedite
a recovery from the April 22, 2010, Deepwater
Horizon oil spill in the Gulf Coast region. At
the onset of this spill of national significance, the
FDIC recognized that some borrowers’ cash flow
and repayment capacity would be unexpectedly
impaired, and that banks should consider assisting
borrowers that would be severely impacted.
Accordingly, on May 7, 2010, the FDIC issued
FIL 24-2010, Guidance for Financial Institutions
Working with Borrowers in the Gulf Coast Region
Affected by a “Spill of National Significance”. This
guidance encourages banks to work constructively
with borrowers experiencing difficulties beyond
their control because of damage caused by the
spill. It also encourages banks to extend repayment
terms, restructure existing loans, or ease terms
for new loans in a manner consistent with sound
banking practices. The guidance recognizes that
efforts to work with borrowers in communities
under stress can be consistent with safe and
sound banking practices as well as in the public
interest. The FDIC also joined the other banking
agencies in issuing a similar directive on July 14,
2010, titled Interagency Statement on Financial
Institutions Affected by the Deepwater Horizon
Oil Spill.

Through field offices in Florida, Alabama,
Mississippi, and Louisiana, and frequent
interaction with state regulators and bank
trade organizations, the FDIC worked hard
to understand the spill’s impact on banking,
commerce, and tourism. FDIC executives from
Washington and the Dallas and Atlanta regional
offices conducted outreach and communicated
with various constituencies to enhance knowledge
of the spill’s scope and effects. In addition, the
FDIC engaged in a concerted dialogue with trade
associations, community and business leaders,
and congressional staff from the Gulf Coast
region to gain an “on the ground” perspective on
the spill’s short- and long-term implications. The
FDIC will strive to maintain this dialogue with
bankers and community leaders to ensure its
supervisory approach prudently accommodates
recovery efforts.

Affordable Small-Dollar Loan Guidelines
and Pilot Program

The FDIC’s two-year Small-Dollar Loan Pilot
Program concluded in the fourth quarter of 2009,
with final data reported to the FDIC in mid-May 2010. The pilot was a case study designed
to illustrate how banks can profitably offer
affordable small-dollar loans as an alternative to
high-cost credit products such as payday loans
and fee-based overdraft programs. At the end of
the pilot, 28 banks were participating with total
assets ranging from $28 million to $10 billion
and operations in 28 states. Over the course of the
pilot, participating banks originated more than
34,400 small-dollar loans with a principal balance
of $40.2 million.

The pilot demonstrated that banks can offer
alternatives to costly forms of emergency
credit, and resulted in a template of essential
product design and delivery elements for safe,
affordable, and feasible small-dollar loans that
can be replicated by other banks. (See www.fdic.gov/smalldollarloans/ for the template). Going
forward, the FDIC is working with the banking
industry, consumer and community groups,
nonprofit organizations, other government
agencies, and others to research and pursue
strategies that could prove useful in expanding the
supply of small-dollar loans. Among other things,
these strategies include:

Highlighting the facts about the pilot and
other successful small-dollar loan models.

Studying creation of pools of nonprofit or
government funds to serve as “guarantees” for
small-dollar loans.

Encouraging broad-based partnerships among
banks, nonprofit, and community groups to
work together in designing and delivering
small-dollar loans.

Studying the feasibility of safe and innovative
emerging small-dollar loan technologies and
business models.

Considering ways that regulators can
encourage banks to offer safe and affordable
small-dollar products, and that these products
can receive favorable CRA consideration.

Information Technology, Cyber Fraud, and
Financial Crimes

The FDIC sponsored a Combating Commercial
Payments Fraud Symposium in March 2010
that focused on the nature of this increasingly
sophisticated form of financial fraud and how the
industry and regulators can effectively respond.
Other major accomplishments during 2010 in
promoting information technology (IT) security
and combating cyber fraud and other financial
crimes included the following:

Published, in conjunction with the other
FFIEC agencies, a Retail Payment Systems
Handbook. The booklet discusses various
technologies and products used in payment
systems and the risk management techniques
that institutions should use.

Issued, in conjunction with the other FFIEC
agencies, an updated and expanded program
to review specialized software used by financial
institutions.

Published, in conjunction with the other
FFIEC agencies, a white paper entitled “The
Detection and Deterrence of Mortgage Fraud
Against Financial Institutions”.

Assisted financial institutions in identifying
and shutting down approximately 47
“phishing” websites. The term “phishing”—as
in fishing for confidential information—refers
to a scam that encompasses fraudulently
obtaining and using an individual’s personal or
financial information.

Issued 130 Special Alerts to FDIC-supervised
institutions on reported cases of counterfeit or
fraudulent bank checks.

Issued 3 Consumer Alerts pertaining to
e-mails and telephone calls fraudulently
claiming to be from the FDIC.

The FDIC conducts IT examinations at each
risk management examination to ensure that
institutions have implemented adequate risk
management practices for the confidentiality,
integrity, and availability of the institution’s
sensitive, material, and critical information
assets using the FFIEC Uniform Rating
System for Information Technology (URSIT).
The FDIC also participates in interagency
examinations of significant technology service
providers. In 2010, the FDIC conducted 2,121
IT examinations at financial institutions and
technology service providers. Further, as part
of its ongoing supervision process, the FDIC
monitors significant events, such as data breaches
and natural disasters, that may impact financial
institution operations or customers.

As an additional element of its leadership role in
promoting effective bank supervision practices,
the FDIC provides technical assistance, training,
and consultations to international governmental
banking regulators in the area of IT examinations.
In 2010, the FDIC provided foreign technical
assistance training to the Central Bank of Iraq and
the Bank of Albania to train examiners and develop
examination policies for managing IT and other
operational risks.

Consumer Complaints and Inquiries

The FDIC investigates consumer complaints
concerning FDIC-supervised institutions and
answers inquiries from the public about consumer
protection laws and banking practices. As of
December 31, 2010, the FDIC received 13,756
written complaints, of which 6,862 involved
complaints against state non-member institutions.
The FDIC responded to over 97 percent of these
complaints within time frames established by
corporate policy, and acknowledged 100 percent
of all consumer complaints and inquiries within
14 days. The FDIC also responded to 1,960
written inquiries, of which 388 involved state
non-member institutions. In addition, the FDIC
responded to 6,666 telephone calls from the
public and members of the banking community,
4,375 of which concerned state non-member
institutions.

Deposit Insurance Education

An important part of the FDIC’s deposit
insurance mission is ensuring that bankers and
consumers have access to accurate information
about the FDIC’s rules for deposit insurance
coverage. The FDIC has an extensive deposit
insurance education program consisting of
seminars for bankers, electronic tools for
estimating deposit insurance coverage, and written
and electronic information targeted for both
bankers and consumers.

In 2010, the FDIC continued its efforts to
educate bankers and consumers about the rules
and requirements for FDIC insurance coverage.
The FDIC conducted a series of eight nationwide
telephone seminars for bankers on deposit
insurance coverage. These seminars reached an
estimated 60,000 bankers participating at over
16,000 bank locations throughout the country.
The FDIC also updated its deposit insurance
coverage publications and educational tools for
consumers and bankers, including brochures,
resource guides, videos, and the Electronic
Deposit Insurance Estimator (EDIE).

Deposit Insurance Coverage Inquiries

During 2010, the FDIC received and answered
approximately 143,000 telephone deposit
insurance-related inquiries from consumers
and bankers. Of these inquiries, 119,000 were
addressed by the FDIC Call Center and 24,000
were handled by deposit insurance coverage
subject matter experts. In addition to telephone
deposit insurance inquiries, the FDIC received
3,000 written deposit insurance coverage inquiries
from consumers and bankers. Of these inquiries,
99 percent received responses within two weeks, as
required by corporate policy.